Complacency And The Subprime Borrower
Readers suggested a topic surrounding the subprime news this week, starting with some quotes from an article. “Let’s talk about complacency for a moment. Ownit Mortgage Solutions, a California-based home lender, closed this week and told more than 800 workers not to bother coming back to work. The Los Angeles Times reported that Ownit simply ran out of cash needed to meet obligations.”
“Here’s where the complacency enters the picture. Michael Youngblood, a research managing director for Friedman, Billings, Ramsey Group, noted that key aspects of subprime loans, combined loan-to-value ratio, debt-to-income ratio, and credit score, did not diverge from long-run averages.”
A reader asks, “Wait a minute…so they have ALWAYS been doing 100%, no doc, no closing cost, stated income/NINA loans to sub-prime borrowers in the percentage and volume that they have been recently? I fond that highly unlikely. Anyone in the sub-prime biz care to comment?”
Another remarked, “The reason it’s changed is that prices stopped going up. When you can simply refinance into an I/O loan you don’t foreclose, rates now are higher than when most of these toxic loans where written.”
“Add in the fact that houses bought last year won’t appraise for what they have outstanding on the loan (since everyone went I/O they haven’t paid down a dime of the loan balance) - and even if they can appraise they can’t afford to refi as rates will be higher. The endgame is here.”
One senses a cash crunch. “I suspect that there are a number of financial players that are discovering a sudden need for cash and that this is the beginning of a selloff in everything. Gold, commodities, bonds, stocks.”
“Once the fly-by-night subprimes start going belly up it can’t be long until those Credit Default Swaps start being called in and certain people discover a pressing need to sell anything they have to generate cash to cover them.”
The New York Times. “Much of the growth of the United States in recent years has been financed by homeowners’ rising wealth. But now the growth in that wealth has almost vanished.”
“The government reported this month that it estimated the equity of Americans in their homes rose a scant 0.1 percent in the third quarter. At an annual rate, that was just 0.5 percent, the smallest gain in more than a decade.”
From Bloomberg. “Sub-prime mortgage bonds had their worst week of the year on concern about the failure of two lenders, the slowing housing market and the ability of borrowers to repay the loans, derivatives based on the securities suggest.”
“An index of credit-default swaps based on bonds rated BBB- and consisting of sub-prime mortgages made this year fell 2.6 percent, to 95.36 today.”
“‘The information that has been released about the state of the U.S. mortgage market is not dramatically different than it was one month ago, two month ago or three months ago,’ said Paul Ullman, CEO of a New York hedge fund specializing in mortgage bonds. ‘What is different is the state of the industry.’”
“When sub-prime mortgage companies who service, or collect payments, on loans are shuttered, their failure is a bigger risk to bondholders than if a company that only lends shuts down, Ullman said. Ownit, which last year made more than $8 billion in sub-prime mortgages, was not a servicer.”
“The reaction this week may be too severe, said Andrew Chow, who manages $5.5 billion of asset-backed bonds and credit derivatives, since ‘investors are looking to the homeowners for the repayment of those loans; they’re not looking to Ownit.’”
“This year ‘is turning out to be a doozy of a year’ in terms of sub-prime loan quality and ’slowing home prices are no longer allowing borrowers to hide behind the covers of a rising housing market,’ wrote Gyan Sinha, a senior managing director at Bear Stearns.”
“There is a risk that sub-prime loans from this year will experience higher cumulative losses than the 2000 vintage, the worst-performing ever, which as of today are around 5.5 percent, said FBR’s Michael Youngblood. Poised to hurt the loans are weakening California job markets and the extent of ‘payment shocks’ when the loans’ rates begin to adjust, he said.”
“With concerns rising in recent months, investors have discriminated more among different issuers, ‘a long overdue change in behavior,’ Youngblood said.”
The Financial Times. “The failure of a small Californian mortgage lender on Thursrday increased nervousness in the credit derivatives market about the large number of US ’subprime’ mortgages extended this year.”
“In recent years, this area has been one of the fastest-growing parts of the market for mortgage-backed bonds. So far in 2006, $437bn of such securities have been issued in the US.”
“As measured by the ABX index, the implied price for bonds backed by 2006 subprime mortgages has fallen dramatically in recent weeks. ‘Market opinion is clearly grounded on a fairly negative view regarding the fortunes of the bonds backing the ABX [index],’ said Gyan Sinha, at Bear Stearns.”
“He said problems are pronounced for bonds backed by 2006 mortgages, which cost almost 100 basis points more to insure than bonds that are backed by 2005 mortgages. Other signs of weakness include higher delinquency and foreclosure rates for 2006 vintage bonds.”
“Moody’s put a handful of 2006 subprime deals on watch for downgrade, the first negative ratings activity for bonds originated in these years.”
‘Fifth Third Bank has announced they are selling $11.4 billion in securities (all or almost all MBS, mostly short collateralized mortgage obligations, we suspect) before year-end 2006 and [is] taking a loss of approximately $500 million. This is the next move in the bank de-levering arena,’ said Alec Crawford, head of agency MBS strategy at RBS Greenwich Capital in a Nov. 21 report’
‘Consumer borrowing fell in October by the largest amount in 14 years. The weakness last month came from a huge falloff in demand for auto loans and other types of nonrevolving credit. ‘The wealth effect from rapidly rising home prices is gone now and that should mean that consumers will be less willing to take on debt,’ said Bill Hampel, chief economist for the Credit Union National Association, an industry trade group.’
‘The University of Colorado’s Leeds School of Business issues a credible economic forecast each December, and its somewhat dour outlook for 2007 seems all the more believable because its economists usually tend to err on the side of optimism.’
‘Since 2000, stagnant housing prices have stalled household income. ‘Increasing numbers of adjustable, interest-only and other mortgages with highly variable payment commitments raise further unease. There is no history to suggest how consumers may react to this unprecedented situation.’
“There is no history to suggest how consumers may react to this unprecedented situation.’ ” Another quote from an economics school that makes my eyes blow out of their sockets. Hey, University of Colorado, why don’t you have your economics professors check Ben’s Blog on a daily basis and get an education on the history of bubbles. Put away those outdated Milton Friedman books and get into today’s real world. Is an MBA ineconomics on the same level as an MBA in physical ed?
And these fools get quoted by MSM reporters who probably graduated from the same school of idiots. I starting to think college is a waste of time and money
And these fools get quoted by MSM reporters who probably graduated from the same school of idiots. I starting to think college is a waste of time and money
As a casual observation, I think part of the issue is that college professors are not on the whole, part of “the best and the brightest”. Those folks figure out that with a little extra work (or sometimes a lot *less* work depending on the profession) there’s a lot more money, perks, and challenges outside of academia.
Sure, some of the best love what they do and stay in college forever, which is what the work of a professor always seemed like to me. However, I doubt that’s the typical professor that the MSM wants quotes from. Profs with a lot of seniority or dept. heads have a lot more parallels in my mind to a typical bureaucrat than a leading intellectual.
Great observation. I am working towards my Masters in Software Engineering while working fulltime. I work with people who are much brighter than the professors (they also have fewer higher ed credentials). What I gain is the discipline to stay on a course of study. Most of the professors can’t even speak English and have setup abysmal curriculmns. It seems to me that acadamia is unwilling or unable to pay the top dollar needed to attract real talent. Anyway, the readings and work assignments with fellow students are helping me stay up on the latest technology or I wouldn’t be doing it. I only hope the piece of paper opens more doors for me…….
Part of it may also be fear to tread too far outside the accepted norms. In the engineering professors I’ve interfaced with at graduate school and in professional settings, many seem to be very precise and exact in the language they officially pubish and use. They don’t want to be misinterpretted or make some statement that will come back to haunt them. Cautious, might be the right word. If they have a bright idea, they’ll pursue it, but will be pretty mum about it until they’ve done the thousands of hours of research and insight into the problem.
Of course, this may be different for MBAs/economic professors…
University of Colorado, why don’t you have your economics professors check Ben’s Blog on a daily basis -
They do (based on my stats) - I have seen most of the top Universities in the US.
I wrote tons on this topic in various threads this week.
The big thing for me is that all manias prior to this stopped when the credit dried up. Its rare that people come to their senses on their own. In that sense this bubble hasn’t popped yet, but will when the MBS buyers tighten the mortgage credit.
The availability of credit to anyone that wants a buy a house has been incredible. Until now the risk of losses on these loans has been shielded by the rise in asset prices and the frequent refinancing by the loan holders.
But the market has changed and MBS holders are going to see exactly what they hold. And most of the MBS stuff is longer term, 5 or more years. If it doesn’t blow up this year, they have the next several years to worry about.
I think MBS buyers are going to get wise to the situation and anything more than a traditional mortgage is going to be gone.
Here’s where the complacency enters the picture. Michael Youngblood, a research managing director for Friedman, Billings, Ramsey Group, noted that key aspects of subprime loans, combined loan-to-value ratio, debt-to-income ratio, and credit score, did not diverge from long-run averages.”
Mr Youngblood also said this:
What markets are likely to show the biggest price gains and declines this year?
We expect the greatest gains in Bakersfield, Calif. (43%), Fort Myers, Fla. (42%), Stockton, Calif. (39%), and Punta Gorda, Fla. (35%); the biggest declines in Harrisburg, Pa. (8%), Odessa, Tex., Roanoke, Va., and Utica, N.Y. (all 6%).
Do you think the housing bubble argument is overblown?
Absolutely. It’s overblown because there is no national housing market, so there can’t be a national house-price bubble. However, there are bubbles in 75 of the 379 markets I studied. A bubble exists when the ratio of the median existing house price to per capita personal income exceeds 6.8 times. This definition is based on historical data of when other markets, like Houston and Boston, had bubbles
“However, there are bubbles in 75 of the 379 markets I studied. A bubble exists when the ratio of the median existing house price to per capita personal income exceeds 6.8 times. This definition is based on historical data of when other markets, like Houston and Boston, had bubbles “
I think that Mr Youngblood is making a mistake, he first mistakes the ratio where a bubble may start to pop in certain areas and thinks that there are not other areas which have bubbled though not to the same degree. Second he forgets that we have a national mortgage system and national media so that this affects his local markets going down just like they affected the local markets going up and so trouble in the big bubble areas will hit the smaller bubble areas though not as much.
When Flip This House is watched so that you can see the latest fool to loose money and when sub-prime mortgage companies are synonymous with bankruptcy and foreclosure this is will effect all housing markets in the country. It effected real estate on the way up, it will effect it on the way down.
Additionally, as the bust propogates, one of the concommitant effects is likely to be a significant decline in per capita income. All of the hallucinated wealth floating around will shear that ratio on the underbelly as it evaporates as well.
“A bubble exists when the ratio of the median existing house price to per capita personal income exceeds 6.8 times.”
*********
Gee, that’s interesting.
What does that say about median house prices in Marin County, with its 9x household income? Or in SF, where it’s greater than 10x household income?
[And note I'm using "household income" for this area, which is larger than "per capita personal income", making for a larger denominator]
“No bubble here. Nothing to see here… move along now.”
Mr. Youngblood’s mistake was opening his mouth so he could reveal to the world just how stupid he really is. 6.8 time income…………get real. When prices have rarely exceeded 3x income in the majority of markets over the past 10 decades? What a shill.
“The failure of a small Californian mortgage lender on Thursday increased nervousness in the credit derivatives market about the large number of US ’subprime’ mortgages extended this year.”
Oh-oh — the lemmings herd is getting nervous. Isn’t this normally what happens just before they race headlong for the nearest cliff?
OT - I read a great article somewhere that stated lemmings do not commit mass suicide - rather it is a migratory phenomena related to the need for resources rather than anything else. I wish I could read it again.
I was just speaking metaphorically, at any rate…
“Contrary to popular belief, lemmings do not periodically hurl themselves off of cliffs and into the sea. Cyclical explosions in population do occasionally induce lemmings to attempt to migrate to areas of lesser population density ….”
We have them too, they’re called “Active Adult Communities”.
http://www.snopes.com/disney/films/lemmings.htm
This is probably not the “great” article you were looking for ….
“Once the fly-by-night subprimes start going belly up”
With closing of these originators (I’m pretty sure the loans got packaged up and sold to investors), what happens when there is mortgage fraud (stated income/liar loans, etc.)? No one around to kick the loan back to, so the investor is left holding the bag, correct?
Why not lie on your loan? You get the house you want, sometimes 110% of the value of the property and if you can’t pay when the rates adjust, big deal. You move out after 2 years and you got to live for free.
Here’s my question:
Why isn’t there Debtors Prison? Don’t you think these idiots whould think twice about buying Hummers and SubZero appliances if they knew they would go to jail if they couldn’t pay?
There is no “debtor’s Prison” because its not a crime to not be able to pay your bills. However, if you commit fraud that is a crime. So the stated income/liar loans that people lied on to get the 110% loan value nto buy the hummer & sub-zero appliances will technically have the potential to go to jail if prosecuted and convicted. Plus any mortgage schemes/fraud are criminal acts which may land all knowing participants in jail.
Joe I read all of your comments and wish it would be so. This mess is rotten from top to bottom….
So the investor is left holding the bag, correct.
That’s why they call it investing, no matter how much they cry they will lose money and nobody will bail them out. I know that people investing in real estate, wether it be speculative property, mortgage backed securities, or whatever schemes they devise, they can and will lose money. Personally I hope they lose their ass.
There has been a lot of talk about the Fed lowering rates in order to bail out the housing market. Now lets take a look at a couple of years ago when the Fed Rate was something like ZERO and thirty year mortgage was 5.30% or so right. Now lets look at now the Fed Rate is 5.25% and the thirty year mortgage is 5.82%. Even at %5.82 the market is going to take a crap because the dominos are falling and everything we have said on this blog is happening. So even if the Feds do lower rates it will not do crap. The market is still screwed. Plus once the foreclosures really start rolling and more MBS take a crap then they will have to raise rates in order to attract more debt funding. This market is in pure free fall, we are talking jumping out of an airplane with no parachute, no rubber life raft like on Indiana Jones and the Temple of Doom, and especially no freakin haystack to land in. There will be no soft landing, just hard asphalt that will not give at all. Splat the housing market is toast. Subprime needs to understand that and only by taking even more desperate measures to loan even more money to people with even more crappy credit scores is only going to make things worse. Subprime and the their legions of crooked loan officers will have in about a years time destroyed the economy and it will make the S&L bail out look like a picnic.
The FRB only controls the short end of the yield curve. The government cannot control interest rates because the bond market sets the vast majority of them. Besides, with 80% of government bonds being purchased by foriegn central banks, we all know who is really in charge of the interest rates, don’t we?
remember, yesterday Fitch Ratings put Ameriquest(AMC something or other) on an “evolving credit watch” of some sort. that’s big news.
It’s huge. IMO it will mark the beginning of the credit melt down.
‘The reaction this week may be too severe, said Andrew Chow, who manages $5.5 billion of asset-backed bonds and credit derivatives, since ‘investors are looking to the homeowners for the repayment of those loans; they’re not looking to Ownit.’
Those investors may find the average Joe doesn’t find much shame in walking away from debts.
China has 1.4 billion people. They can ship a few million over here to occupy those McMansions since they bought so many MBS
Not really. The MBS’s, as I understand it, aren’t tied to specific houses. Different parts of the loan/loans are chopped up and put into catagories. If it really gets wacky, I don’t see how they will know who owes what to who.
Maybe they can at least figure out in which order GFs will be excluded from sitting back down in those musical chairs they have been circling…
First off there are many types of MBS. So its very important to be clear about what we are talking about.
The largest by value are simple uni-tranche “pass-through” certificates, where each month you get a portion of the principal and interest payments on a pool of mortgages. These are the main product of the GSE’s. The GSE’s garantee the full payment of principal and interest, *but* not the timing therof.
That makes the life of certificate variable, if people prepay, your 30 year certificate could be repaid in five years. This is a nuisance.
Because of this prepayment risk, multi-tranche MBS were developed. There are based on a “waterfall” of interest and principal repayments. Depending on how the waterfall is arranged, you can create bonds with any desired credit/prepayment risk profile.
Each month the cash comes in, and first the AAA rated tranche gets paid, then the AA tranche, all the way down to the “equity” tranches. The MBS bonds are claims to cash flow from a pool of mortgages, not individual mortgages.
The main problem is what you if you get more defaults than expected and what if they happen sooner than expected.
—
Slightly related to this topic, but I’m going to be writing a series about Asset backed Securities for my blog. The first part on CDX is already up. Sometime next week I plan to have a peice up on CDO’s.
http://gewinnvortrag.blogspot.com/2006/11/will-cdo-machine-destroy-public-equity.html
Yeah, apparently Chow doesn’t understand (or won’t admit) the nature of the loans Ownit made make it likely the home “owners” will perform as about as well as Ownit itself.
Is this guy a fool or simply spewing spin?
“Moody’s put a handful of 2006 subprime deals on watch for downgrade, the first negative ratings activity for bonds originated in these years.”
Just the start. Why have the bond rating agencies been so asleep?
I estimate, due to contracting sub-prime credit alone, that there will be 20% fewer dollars available, at best, for Southern California real estate transactions. Since its a fractional commision based industry, their takehome will drop by more than 20% (due to fixed fees, e.g., office rent, IT support, etc.) awwww…..
I’d better go stock up on popcorn. It looks like we’ll have a spring shortage of it.
Neil
‘Why have the bond rating agencies been so asleep?’
You touched on what has cause much of the complacency about the housing bubble in general, all along, IMO. Moodys, Fitch and S&P have been telling the world that all is well, and that the US taxpayer will back the GSE bonds. The bond folk pay the credit raters, so the reasons aren’t hard to figure out. You’ll find many posts on this topic on my original HBBlog in the spring of 2005.
Yes, this (unrealistically optimistic credit ratings) has been a pet peeve of mine. I have to think the derivatives are a bit part of the problem, though.
Been waiting TWO YEARS for this to shake out. As people were noting in early 2005, it’s been like watching paint dry (or peel). This unraveling has **not** been fast, as some are claiming. The resilience of the credit markets has been remarkable, IMHO. Lots of false starts (like FNM in the fall of 2004, which many of us thought would bring the market down at that point).
Perhaps, now, the worm has turned. I’m excited and anxious as it might finally be happening.
It is this (MBS/CDS) market which we needed to fail in order to really get the bubble to burst. Psychology (and hitting the “affordability ceiling” — even with toxic loans — has been the reason for sales falling up to this point. The decimation of the credit market is what will really bring prices down to realistic levels, sellers be damned. Looks like we may finally have our day in the sun!
Pass the popcorn, please!
“You touched on what has cause much of the complacency about the housing bubble in general, all along, IMO.”
Why not extend the scope of this comment to all conundrumishly-mispriced risky asset classes? The risk premium has been missing in action for years now…
It’s the “chasing yield” phenomenon. Slashing the federal funds rate to multi decade lows had obvious effects, such as inflating the housing bubble. But it has also had a not-so-obvious effect … it has forced investors the world over to reach for yield. Insurance companies … pension funds … hedge funds — they all need to deliver certain percentage gains over time to meet obligations. When risk free rates plunged, they had to buy corporate bonds to get higher yields. That buying drove down corporate bond yields, so they turned to mortgages … subprime asset-backed securities … commercial property … REIT stocks — anything with yield.
At the same time, the Fed decided to shift to a “let’s show the market all our cards” method of hiking rates. They telegraphed every rate hike, and stuck to the “25 bps at a time” game. This made investors even more willing to chase yield because the path of interest rates (short-term rates, anyway) was completely clear to them. It’s no wonder the VIX … VXO … and the Merrill Lynch MOVE index all collapsed. These measures of volatility (in the stock and bond markets, respectively) compressed because everyone basically knew what the Fed would do at every meeting.
BUT in the past few days, that has shown signs of changing. The stock volatility indices have popped up from multi-year lows and the MOVE index (a measure of bond market volatility) has also broken out to the upside. They aren’t major moves yet, but it could be a sign that risk premiums are going to start re-appearing in assets again for the first time in a long time. We’ll see.
http://interestrateroundup.blogspot.com
I’d like to see mortgage rates go up and home prices go down. Mortgage interest is deductible, but ridiculously high home prices aren’t. Besides, you can always refinance if rates go down. You can’t go back and change the price of that $800K stucco McMansion.
Don’t forget property taxes, as well!
Lower prices are better for everybody, all around. Even home “owners” are better off with low prices (and lower prop taxes!). Buyers can afford modest homes for their families. People can live simple, happy lives without the trappings of “success” like huge SUVs, 4,000 sf McMansions with marble flooring, etc. — all purchased on credit.
People need to live off income, not debt. The whole “equity extraction” nonsense is entirely destructive to our society, IMHO. Your “equity” is DEBT, unless you actually sell your house. Why do so few people understand that????
Or one’s home equity is the next homeowner’s debt. Either these loans are going to end up being liquidated for pennies on the dollar or we’ve just funded 50% of the economic growth of the past few years on future productivity (which will be required to pay off these loans).
Or I guess we can just inflate these suckers away, though with international trade patterns these days I don’t think incomes are going to be able to keep up with prices.
“People need to live off income, not debt.”
i actually do, but if most of the country did the economy
would come to a halt
why save for the special item when you can have it now!
22yr olds with condo’s,bmw.s,plasma’s and all the clothes
and shoes plastic can buy
I’d like to see mortgage rates go up and home prices go down. (Mortgage interest is deductible, but ridiculously high home prices aren’t. Besides, you can always refinance if rates go down. You can’t go back and change the price of that $800K stucco McMansion.)
Well put.
I would just add to this, look at S. FL as well. With Save our Homes, the price you pay for the home is the tax base for your home forever (well, not really, 3% appreciation allowed per year)!!
Lower home prices, lower taxes. Duh!
Now, the real question. Where in the hell is all this money going? Taxes just about doubled in some areas in the past 5 years. My god, how wasteful can govt be? Did anyone even THINK about lowering the tax rate per dollar?!?
One of the spins about the Ownit and Sebring shut downs is that they were “struggling with the turndown in originations.” That couldn’t be further from the truth. These Boyz were pouring out toxic loans right to the end. Sebring did $209 million in 2Q,2006 vs $235 million in 2Q, 2006, and Ownit did a whopping $5.5 billion in first half, 2006, versus $8.4 billion in all of 05.
The real reason for this is that the subprime credit market is seizing up. In fact, all of us who have followed this story, no doubt have wondered what took this so long.
The attempts to sell Option One’s and Ameriquest are dead on arrival. In fact, because they are for sale, I’ll bet their loans have been under real strutiny, and the word is getting out how bad the are.
Great point. The yield curve in action. I think I read that Ownit lending was up 40%+.
Speaking of the yield curve, I suggest anyone who takes the Saturday WSJ to carefully compare the yield curve graphs on the second page of the Money section (I think it is p. B2 on Saturday?). The interesting part is what has happened at the short end of the curve in the past month (around 2 years duration, if memory serves):
In particular, the bond market is clearly shifting in a direction which suggests increased likelihood of a near-term recession.
I’ll bet their loans have been under real strutiny, and the word is getting out how bad the are.
hehehe…and I’ll bet the properties securing the debt are worse than the documents.
Sub-prime properties was nearly always heavily depreciated and economically obsolescent dogshit.
Dirty, dishonest appraisals were the lynchpins for these POS’s raking in their millions in blood money.
Nothin’ left but the dregs for whoever’s holdin’ the paper. The scope of the fraud is enormous.
No financial mind exists to sort this mess out.
Oh boy.
If what you say is true, Russ, 2007 is going to be a wild ride.
There are so many reasons for 2007 to be a wild ride, Russ does not even have to be right (even thought he probably is). The sub-prime cesspool is just one of the wicked twists on this rollercoaster.
Examples of complacency. Here is a mortgage broker who either doesn’t know or claim to know, that the MBS market is hardly “calm” now, and my retort. Notice all the happy face photos.
He says:
“Strangely, mortgage rates are up by as much as 0.250% today. I can only assume that lenders are protecting themselves against future movements in price because the calm activity in the mortgage-backed securities market shouldn’t warrant such a drastic change. ”
http://www.themortgagereports.com/2006/12/mortgage_rates_.html#comments
The bond market showed a similar lurch up yesterday — biggest one-day increase across the long end of the curve that I have noticed in some time.
Barrons has a piece on this:
Cracks in the Mortgage Market are Becoming Visible
http://online.barrons.com/public/article/SB116554091799444154-swmkmppqGO0aEcaUu_8z3fHdm1k_20071209.html?mod=9_0002_b_online_exclusives_weekend
One of the largest providers of mortgages to borrowers with marginal credit abruptly closed its doors earlier this week. Moreover, derivatives based on the lowest tier of subprime mortgage securities have been plummeting in price in recent days, sending the cost of insuring against these loans’ default sharply higher.
Ownit would sell loans it originated to Wall Street, which repackaged them as mortgage-backed securities. But, as Dow Jones Newswires reports, the issuers of the MBS can force Ownit to take back loans that go into default. Ownit ran out of cash to repurchase the bad loans for the street, according to industry sources quoted by Dow Jones Newswires.
“Ownit ran out of cash to repurchase the bad loans…”
Imagine that!
As Warren Buffett has said, the derivatives are only as good as the counter party creditworthiness. Ownit is one rotten counterparty for billions in exposure. Like they can really back their buyback guarantee if the mortgages go sour quickly. So that was exactly it. Ownit sees the tidal wave of defaults coming, the big guys made their money so its close the doors and file and leave all those counterparties hung out to dry.
But such have been the excesses of this housing bubble, and now, bust. Borrowers whose main qualification was the possession of a pulse could avail themselves of an array of new “affordability” products — 45-year, interest-only adjustable-rate option Libor-based loans. That gibberish boiled down to a monthly nut that got homebuyers into houses with inflated prices that they really couldn’t afford. Not surprisingly, foreclosures are soaring — up 51% in the three months ended October from a year earlier, according to Realty Trac.
these people who bought these homes with the only concern
being how much a month? really are screwed
i still see homes advertised by the monthly payment (teaser i’m sure) no mention of the actual price or the details of the loan
i think everyone is focusing on subprime, which accounts for most of the marginal borrowers out there, but most have forgotten about the prime borrowers. trillions for refinances for cash out (mostly to 80%) and purchases at 100% (down payment are for the weak). these borrowers are as highly levered as the subprime borrower. with a 10-15% depreciation, these “prime” borrowers are under water. most of my “a” customers in 2006 refinanced into a higher interest rate, pulling money out or paying down their helocs. you can be sure they wanted to keep the heloc open as well.
most of my “a” customers in 2006 refinanced into a higher interest rate, pulling money out or paying down their helocs. you can be sure they wanted to keep the heloc open as well.
————————
Thank you, as always, for your contributions, boulderbo! I think your comment shows how even financially “responsible” people are living on the edge of bankruptcy. This is what I’m seeing among our friends. All earn fairly decent money, but they have leveraged themselves to the extent there is no breathing room. A number of people we know have recently refinanced. Not to get lower rates, but to take out more cash as they sense their “equity” slipping away in the form of lower housing prices. Last chance refinancing, then….
These middle-class wannabes are the people who will make the political waves if the sh*t really hits the fan, because a lot of them would consider it unthinkable that THEY should ever have to enter a world of financial pain.
It’s an easy step from that attitude to assuming that your situation MUST be “someone else’s fault”, and therefore that the gummint should do something to help you out.
As I posted on my blog a couple days ago, the latest (Q3) stats for the entire banking industry (the Fed publishes this stuff) show an uptick in residential real estate loan delinquencies. The 30-days-or-more late payment rate jumped to its highest since Q4 2003. Lots of the banks tracked specialize in plain-vanilla lending, so this is an indication that you’re spot on … the problems may be WORSE in the subprime world for obvious reasons, but even many Alt A and prime borrowers are in over their heads.
http://interestrateroundup.blogspot.com
That’s another thing that’s always made me LOL — somebody saying that the mortgage/MBS market is safe because most borrowers are prime. Wait a short while… they won’t be anymore! The 5% rise in homeownership these past years is almost entirely due to sub-prime lending, and when they’re all defaulting they’ll take a lot of primes down with them.
Reminds me of the arguments that since housing is only 6% of the economy that it can’t cause a recession. Well, if 6% of the economy constitutes 90% of recent economic expansion it will sure as hell have an effect.
“The real issue is the spread of that debt. There is no question that more homes now have very high loan-to-value ratios, or that more mortgages have features that could cause monthly payments to soar. Either could cause severe distress for some homeowners if home prices fall or a recession threatens incomes. Owners could find they own homes worth less than they owe or that they cannot afford the new monthly payment. A wave of defaults could come even when most homeowners have ample financial flexibility.”
As long as we have so many high LTV loans already, why not adopt yet another program to relax lending standards and reduce downpayment requirements? The more the merrier…
And BTW, the NAR and HUD recently got together in bed to plan for further relaxation of downpayment requirements.
http://biz.yahoo.com/prnews/061110/dcf040.html?.v=54
Good point . Prime borrowers quicky over extending themselves at the slightest market uptick who have now become sub-prime .
Sub prime default is now showing cracks, but what about all the real estate professional who extended themselves out the last few years thinking the party will never end. I bet a lot of them are prime borrowers and when their commissions get cut in half they will be another domino falling over.
After watching the paint dry for years now… sub-prime shops closing their doors may actually, finally, signal the beginning of the end. Until this happens, I believe that this bubble will not stop expanding because there is no limit to the supply of greater fools. Even if the supply of greater fools is reduced, forcing the REIC to scrape the bottom of the barrell, they will never run out.
The “Trump dream” is all Americans have left. They sense that the middle-class lifestyle is slipping away. They believe their only chance to be the “owner” in the “ownership society” is through real estate - they sure as hell aren’t getting there by working for a living. They will never see the light through logic, reason, and restraint - only force will change their behavior.
American culture was built on this dream of a strong middle class and each generation having the opportunity to better their status. This is a deeply entrenched dream. It will not be willingly abandoned.
The gates to easy credit must be slammed shut for this to end. Americans’ real-estate-wealth-fantasy must be beated out of them and pried from their death-grip.
Dissapearing sub-primes reminds me of how the dot coms just vanished day by day… with a wimper not a bang.
Well said, Ground Zero!
Youngblood of FBR is probably right that the AVERAGE combined LTV hasn’t changed much. UBS or CSFB (one of them Swiss guys) had a newsletter article two weeks ago, talking about 2/28 subprime ARMs. They said that the average CLTV was less than 1 percentage point higher in 2006 than it was in 2002, but when you looked at the whole distribution, the % of loans at less than 80% and the percent of loans at 95% or above had both increased, and the % of 100 LTV had gone from negligible in 2002 to something in the teens by 2006. The average is hiding a lot of action in the riskiest tail.
Think the subprime business model is to exploit these markets to the max, to the bitter end and mostly for upfront fees, and then completely pull the plug fast.
Russ Winter. Bingo that is exactly the model. Makes as many crappy mortgages as they can bleed the company in the form of bonuses for top management and then close the doors.
One would suspect that the same might be true of the people taking the default insurance side of CDO’s. Take the premiums while the taking’s good, then hightail it out of Dodge before you have to deliver.
Maybe that’s why there’s been such an explosive move in the subprime spread recently.
The following post appeared on a stock trading board I visit occasionally:
“I worked as an independent loan officer for 2 yrs in Houston. I specialized in cash out refis in subprime mkt. I’d buy 200 leads who inquired online by target zipcode in Houston area per month in hopes of closing at least 6-7. I’d pull credit history and they all either had huge debt to income levels, poor payment history, delinquencies, chargeoffs, and or bankruptcy. That is why they were subprime. I worked with all income levels, races, investors, and focused on houses 100-350k. Median house in houston is about $145k. Anything over $350 required more work, had a much lower closing rate, and customer shopped more.
The shocking part is I did loans on several doctors and lawyers making well over $250k who couldnt pay monthly obligations and had to cash out equity to consolidate CC and vehicle debt, or get cash no questions asked. Many people seem to think only dishonest immoral people file for bankruptcy. I was shocked at how many people like educators and seemingly successful people had Bankruptcies on their records and were then able to possibly get more credit cards to become delinquent and get another mortgage to get forclosed. Many loans were refinanced at a higher rate, some actually going from a nice 6% 30 yr fixed with 10-15 yrs left to a 7-8% or higher 2 yr ARM that would get them cash needed to get caught up on debts. Lawyers, and many other backgrounds I did as well. People who should be making enough money to live a comfy life, grow assets and stay out of debt, and who you’d think had some financial sense. It was madness and to see someone resort to a last desperate act to salvage their materialistic unaffordable lifestyle because personally I can’t stand debt and don’t have any except in my margin account.
These people are many of your 2 income neighbors living in nice suburban homes, driving 2 nice cars, a college student at home w/car etc that look well off on the surface but are barely going month to month Consolidating debt with a cash out refinance loan may reduce monthly pmts by a few hundred dollars but you may have to refinance a bigger loan at a higher rate, some even going from a low fixed rate to an ARM loan because that’s the only way they could initially afford it and reduce monthly cash outflow.
I had 35 cos to write business through and each month they ran loan specials which were emailed to me. Some would take loans with up to 55% debt ratios, Thats total monthly obligations as shown on credit report / documented W2 income. If they had a bankruptcy on history, I had co.s I that would do loan if it had been discharged 1 yr by the court. A 500 trimerge credit history (middle score on 3 agencies) is all i needed to do the loan. Some loans were stated income meaning all I had to do was get a letter signed by them stating that they made X per yr. Id calculate debt ratio needed to get a certain rate to push the loan through, explain what I needed and never had anyone question it. The reality was that they didn’t make this much. Most self employed did this type.
Appraisals were inflated if I need it to be. I’d tell the 3rd party independent appraiser what I needed to get 20% equity required for refinance loan and he’d “see what he could do” .I was not legally responsible for anything done 3rd party. If I need some magical numbers I knew who to go to and they made $300-400 per appraisal done in an hours work. Win by me, win by all 3rd parties, and win by customer…at least short term.
When people would inquire about a loan online, they’d get their contact info forwarded to up to a dozen places where loan officers purchased leads. In order to differentiate myself from the sharks, I was brutally honest always explaining the process and risks involved while documenting that they were aware, even when laws or my co. didn’t require it.
To speed process up I’d price the loan to where I’d make about a third less than what I knew the other guys charged and could lower fees to what I needed. I couldn’t imagine used care salesman worse than some of those I knew who would lie, forge documents like W2s, sometime with customer knowledge, most not. I differentiated myself by giving them a rate and/or fees that few else would do, being brutally honest, and if they didn’t want to do business with me, to send me the other loan officers paperwork and I’ll tell you how to make him lower the rate and/or fees. The nature of it all was much worse in other states like CA and NV which have much less state regulation.
Even though I knew of lawsuits against brokers for fraud, I didn’t know of any who were never prosecuted criminally. The loan officer would be fired and the broker agency insignificantly fined, and a lawsuit possibly settled. Nothing ever published in papers and business continued. FBI raided several Ameriquest office and they eventually shut them all down but no one was convicted and co. settled lawsuit.
I never did anything illegal but their were so many loans I did that I knew would eventually lead to foreclosure b/cI knew the people lacked discipline and wouldn’t make the necessary changes required.
Before Oct 06 Bankruptcy Law took place, you could file for bankruptcy every year and some mortgage lenders would get you a new loan once it was released by court for a year. You could run up a credit card limit, not pay it, and a year later apply for a new one. Foreclosures and Repos the same way. So personal bankruptcies never affected our economy like they will now when you owe the money until its paid otherwise you won’t get a loan for anything.
Interest rates staying the same still won’t stop 300 billion in ARMs to reset 2% or more next year and over 1 trillion in 08. Assuming a best case slowdown in foreclosure growth rate, it will be a disaster. But realistically, foreclosures will increase faster % as this first wave resets at a time of falling prices and potential recession. Also assuming home inventories stay the same and home prices stabilize, it will be a disaster. Add a recession with massive layoffs, you will have millions of homes purchased at top of price cycle with negative equity forclosed on, and millions having no possible way to get themselves another home for years to come at best. The fact is, regions don’t matter in a macro discussion. TX will feel several hundred thousand foreclosures on the market and a few million who no longer have a dime of credit.
Foreclosures are increasing at an increasingly faster rate, thus increasing home inventory, builders reducing new home costs to compete with huge existing supply, causing median prices to fall a few %.
When you have a few % in value drop for millions of homes purchased a couple of years ago with little or no equity and not a chance to sell it within months unless you take a huge loss, and new laws on the books.you have a decade long disaster waiting.
I see a lot of confused, misguided people on this board that see only housing as a regional per sq ft price value only and not as a multi tiered component , with each teir having enormous impact on our economy by itself.
Geez, I must conclude that rest of the sheeple masses out there haven’t even considered it as a problem unless they are selling their home and even then….”
Ok, that’s it…
We now officially live in The Potemkin States of America~
I love the information flow on here!
Bravo! This guy tells it like it is.
Soooooo… any more of you ready to join the “depression camp”?
The shocking part is I did loans on several doctors and lawyers
. . .
Many people seem to think that only dishonest immoral people file for bankruptcy.
Many people also think that only the great unwashed can be dishonest and immoral.
thanks/danke
A great find, 4shzl!
I’m fascinated when the insiders feel compelled to share about how bad things really are. I think I’m going to be printing this thread out for my hard copy file.
i work for the largest subprime lender in the country,and in my office we turned down 6 debt consolidation loans this week,people w/no equity who needed to refinance, i had a couple who had a 575,000 mtge no money down and a pick a pay mtge,between them they made 2200 a month….subprime mtge companies will not bail these people out,if my company doesent make the loan no other one will…..THIS IS THE END GAME,WE ALL HAVE BEEN WAITING FOR,THE FUNNY MONEY IS OVER…….
THIS IS THE END GAME,WE ALL HAVE BEEN WAITING FOR,THE FUNNY MONEY IS OVER…….
—————————
But, do you really think this is it? I’ve become so cynical while waiting for this to end. Seems there were plenty of occasions (FNM in fall ‘04, Yuan revaluation in ‘05, GM credit junked, Refco & Amaranth blow-ups, etc.) where the bears were celebrating the end of the bubble, only to watch as it continued, strong as ever. This credit bubble has been relentless, and it seems as though it will never end!
Do you see anything which could blow yet more air into this bubble? Any rumblings of a Fed bailout package? Will they finally let this thing go, so we can get on with REAL business, already?
Doing the math here…. 2200 month 26K per year and some asshat lent them 575K?
Uh. I make 2200 per week and my wife isn’t working. 575K seems like a lot to me as well. How the heck did anyone expect them to pay?
Sub-prime is just the beginning because housing has always been a up-flow market. 1st time buyer enters, allowing seller to use equity to trade up, and on and on until you get to the top end ($1m to $1.5m). Real luxury doesn’t start till $2m ($3m+ in NY). That top market is going strong but that’s shark money because its the Fixed Income packagers and hedge fund guys that market their FI profits to market for most of 2006 and then spent their their bonus on these really high end stuff. In the 1m to 2m markets there is no volume whatever, completely dead. Check out the njrereport, stats there show months of inventory at infinity in McMansion counties. Foreclosures in this segment hasn’t hit yet, but its coming.
Any rumblings of a Fed bailout package?
Of course there’s going to be Fed bailout package. The long end of the Treasury market started smelling it this week — which is why it started getting squirrely. Not much fun to be holding all those coupons when the Fed hits the button marked “MONETIZATION,” right? Yes, Ben may be able to rescue some ARM borrowers, but will the bond vigilantes close the door on fixed-rate refis by sending 10-yr. yields soaring? My answer is in the affirmative.
I gotcher bailout affirmative, and raise ya relax on those BK rules.
If the Fed bails out the FBs, who’ll bail out the Fed?
As I said before, it’s not “Too Big To Fail”, it’s “Too Big to Bail”.
Yes, Ben may be able to rescue some ARM borrowers, but will the bond vigilantes close the door on fixed-rate refis by sending 10-yr. yields soaring?
Could you explain what you mean here. I would think that lower short term rates would bring down long term rates as well?
Not so. Long term rates are governed by the bond market’s inflation expectations, since inflation severely diminishes long-term returns.
It does seem odd, but the Fed’s rate increases have actually served to hold down long term rates by convincing the bond market they are containing inflationary pressures.
No. If the Fed lowers short term rates, it will be seen as willing to sacrifice the US$ to save housing. Which means overseas lenders will demand higher yields on US$ debt, or even worse, start dumping the debt they already hold.
The govt will bail out and it may already be happening. Check out the BIS website they have a whole series of studies on mortgage finance and these capital adequacy rules. details way over my head, but they say that Fannae Mae is already buying all the default risk on sub-prime etc. because it has the lowest reserve/cap requirement in the system. Someone lends conforming loan, this is packaged into a group, the first tranche to hit default goes to Fanny mae, rest in mkt. When defaults go up, all these players will say that fanny mae has to take first hit. If congress and govt is happy to let it fail, fine, but if not then it will have to be capitalized.